Boosting Brexit resiliency for corporates: 8 ways your business might be impacted

7 minute read

The end of the Brexit transition period is looming fast. In this quick-take, Corporate Sector Advisory Head Rupert Taylor gives an outline of how Brexit could affect UK companies and how coronavirus may exacerbate or mitigate some of these impacts.

With the end of the transition period just around the corner after a year of disruption, businesses need to ensure they are prepared for Brexit. In this quick-take we consider eight ways your business could be affected by Brexit. However, in these unprecedented times of global pandemic, it’s not that simple: we need to factor coronavirus into our equations too. As you’ll see, in some of the ways coronavirus could actually help mitigate the impact of Brexit.

1. Tariffs

If the UK and EU don’t reach an agreement before the end of the transition period, trade rules would change from those of the EU single market and customs union to those of the World Trade Organisation (WTO).

WTO rules and tariffs are likely to be adverse for several sectors – notably manufacturing (particularly automotive and textiles), agriculture and food. The effect on the manufacturing sectors may be further exacerbated by the trend towards outsourcing and extended supply chains that we’ve seen over the recent past.

A no-deal Brexit would have a major impact on UK trade, as around 40 existing full or partial trade agreements between the EU and 70 countries around the world would no longer apply.

The impact of coronavirus

·         Coronavirus isn’t likely to have a significant impact on tariff setting.

·         However, the impact of coronavirus has led to some firms looking for more resilience in their operations and supply chains, which may lead to an increase in re- and near-shoring, offering some potential mitigant to the impact of higher tariffs.

2.  Border delays

Border delays are a major concern: the UK government has published a Border Operating Model setting out the full range of checks needed for trade with the EU. This includes contingency plans such as “Operation Brock”, the name for a series of measures that improve Kent’s resilience in the event of cross-channel disruption. It has stages that can be deployed sequentially, scaling up or down to meet demand¹.

Several industries are concerned that a shortage of customs intermediaries remains the biggest constraint in terms of making sure customs paperwork is correct. Although there are preparations underway, such a shortage could still cause delays at the border.

Border controls will be introduced in three stages from 1 January 2021 to 1 July 2021, with the increased documentation introducing higher costs for both importers and exporters.

The impact of coronavirus

·         Coronavirus adds an extra layer of operational difficulty in co-ordinating customs checks. But coronavirus may support more on-shoring and may have led to increased stocking, meaning border delays may become less of an immediate concern.

 

3.  High operational stocking impact

Brexit may result in disruption to industries that rely on very efficient supply-chain logistics / just-in-time business models due to the impacts of tariffs and the increased time it takes for components to cross borders.

The UK government has suggested that pharmaceutical companies stockpile six weeks’ worth of drugs² to minimise the impact of post-Brexit disruption on top of the existing problems that have been caused by coronavirus.

The impact of coronavirus

·         A continued or third UK lockdown may complicate the re-routing of stock, leading to key components and input materials sourced from the EU being stockpiled.

·         In certain industries, coronavirus may have pushed companies to rethink their supply chains in a short-space of time: some of these lessons may be useful in facing Brexit.

 

4.   Economic growth

The Bank of England has noted that coronavirus has been a bigger source of uncertainty for businesses than Brexit has been at any time in the past three years, and is likely to weigh heavily on business investment.

The tapering of furlough schemes and other government assistance is likely to reduce consumer confidence, and Brexit is only likely to compound the difficulties.

The travel, leisure and offline retail sectors continue to be significantly impacted by coronavirus, although food retail has benefited from the pandemic. Agricultural tariffs could lead to food price rises post-Brexit, further hitting growth potential.

The impact of coronavirus

·         The economy has taken a far bigger hit in the short and medium term from coronavirus than Brexit is likely to result in. However, Brexit has the potential to slow the UK’s recovery from coronavirus and coronavirus may have removed focus from UK businesses’ Brexit transition plans. 

 

5. Labour mobility / casual labour

Under the proposed immigration system, freedom of movement for EU citizens into the UK will end on 1 January 2021, and they will be treated the same as people from the rest of the world. This could have a big impact on the availability of labour.

One of the biggest risks for the new UK visa system is if EU countries provide favourable terms to their own skilled employees, making emigration to the UK look less attractive. This would require the UK to increase training, education and skills locally.

The impact of coronavirus

·         Brexit is causing the low-skilled labour force to shrink but the unfortunate increase in unemployment caused by coronavirus may mean this gap is more easily filled.

·         If coronavirus reduces the number of international students coming to the UK, there may be a shortage of skilled applicants choosing to stay and work in the UK in the future. Other considerations are that the anti-globalisation effect of the pandemic is reducing people’s desire to move for work, and an increased speed in investment in automation and digitisation as a result of coronavirus may reduce the need for certain forms of labour.

 

6.  Overseas inwards investment

Investments from the EU into the UK have been falling since the Brexit vote, such that there was net disinvestment in 2018³. 

Although foreign direct investment (FDI) from the EU will not dry up after Brexit, investments in the EU might look more attractive - albeit a weak pound could increase the UK’s attractiveness.

FDI typically increases national productivity and therefore output and wages. UK companies may suffer from reduced technological research & development (R&D), capex funding and project financing, which may cap their output and reduce innovation in their operations. The government can make up investment shortfalls in critical infrastructure, but industries where innovation and transformation are important, such as manufacturing, technology, media and pharmaceuticals, may suffer relative to their European competitors.

The impact of coronavirus

·         We expect coronavirus to further weaken the trend of globalisation and accelerate the expected reduction in foreign investment due to Brexit.

·         Another consideration is that a weak pound could help mitigate by increasing the investment attractiveness in the UK.

 

7.  Operational difficulties

Tariffs, increased customs checks and border delays will reduce the competitiveness of UK manufacturing. Manufacturers that source key input materials and components from the EU may choose to outsource, although coronavirus could act as an opposing force

Operation Brock may ease border delays if it’s successful, but the combination of coronavirus and Brexit poses the risk of less resilient, single-source manufacturing supply chains breaking down.

The impact of coronavirus

·         Operational difficulties could reduce the competitiveness of UK manufacturers.

·         However, a reduction in global trade could see an increase in manufacturing re-shoring / near-shoring, which should help mitigate the impact on UK manufacturing.

·         Similarly, coronavirus has highlighted the need for resilience in supply chains and some operational slack, meaning coronavirus-inspired changes such as multi-sourcing and near and on-shoring may also mitigate some Brexit impacts

 

8.  Regulation 

There may be increased costs to UK companies from duplicating existing EU standards regimes or adhering to multiple regulatory regimes if equivalence with EU is not maintained.

In some sectors, such as chemical, there will be a clean break from EU regulation with the implementation of UK REACH (Registration, Evaluation, Authorisation and restriction of Chemicals) from 1 January 2021⁴.

The impact of coronavirus

·         It’s currently difficult to assess the impact coronavirus will have on regulation.

 

In summary, coronavirus has delivered a significant shock to UK businesses.  The advent of Brexit will mean UK businesses have to further adapt their operations and ways of working, whilst already under strain. 

However, some of the likely medium-term effects of coronavirus, from acceleration in automation and digitisation to increased resilience in supply chains and operations, to potentially further reductions in global harmonisation, may act as a counter-balance to the some of the adverse impacts of Brexit. 

Businesses who have responded to coronavirus with agility, quickly adapting to supply chain challenges, new ways of serving customers and workforce changes will be well placed to respond to Brexit too.

 

Source:

1.     https://www.gov.uk/government/consultations/enforcing-operation-brock-plans-in-2021

2.     https://www.bbc.co.uk/news/business-53641803

3.     https://commonslibrary.parliament.uk/foreign-investment-in-uk-companies-in-2018-and-the-effect-of-brexit/

4.     https://www.hse.gov.uk/brexit/reach-guidance.htm